BoJ hikes, Microsoft disappoints, Fed decides

The Bank of Japan (BoJ) raised its rate to 0.25% as cautiously expected and announced that it will reduce the monthly bond purchases in a predictable manner – but allow enough flexibility to support stability in the JGB markets. More importantly, the language in the communique was quite bullish on prices. The BoJ officials said that ‘underlying CPI inflation is expected to increase gradually, since it is projected that the output gap will improve and that medium- to long-term inflation expectations will rise with a virtuous cycle between wages and prices continuing to intensify.’ The latter hinted that today’s rate hike is certainly not the BoJ’s last one. Now, all eyes are on BoJ Governor Ueda for further tips and hints. The 10-year JGP yield is pushing higher after the decision and the yen is in demand. Both the USDJPY and the EURJPY tested their 200-DMA to the downside, the GBPJPY extends and consolidates losses below the 200 mark, and there is reason to believe – with what we heard from the BoJ thus far today – that the policy will become less loose to support the Japanese yen in the medium to long run.

Across the Pacific, the Federal Reserve (Fed) also started its two-day policy meeting and will announce its decision later today. The Fed is not expected to make a change to its rates today, but is widely and wildly expected to hint at a September rate cut. Activity on Fed funds futures doesn’t only hint at a 100% chance for a rate cut to happen in September but it also shows that the doves are getting ahead of themselves with the assessment of a nearly 15% chance that the Fed could cut 50bp or more in September – which will obviously not happen unless there is a big crisis or stress on the financial markets. Therefore, the stretched Fed pricing is a sign that the Fed cut expectations went too far and that we shall see a correction even though the Fed hints strongly at a September cut today – with the risk of hardly upsetting the market if it does not.

The US 2-year yield remains on track for further weakness in the base case scenario of a hint for September cut, while the US 10-year yield consolidates near 4.13%, the US dollar is softer this morning, but the index remains in the bullish trend – above a major Fibonacci support to its ytd positive trend, as the rate cut bets elsewhere rise along with the Fed cut bets. In this context, the EURUSD tipped a toe below the 1.08 yesterday after a surprise slowdown in German growth casted shadow on a better-than-expected EZ GDP number. Inflation figures on the other hand were encouraging in Spain but less so in Germany. The aggregate EZ inflation figures are due later today. A sufficiently soft set of data should keep the European Central Bank (ECB) doves in charge of the market and not let the EURUSD gain too much strength in case we see a dollar rebound after the Fed decision.

Tensions and Franc

Note that the US long-term bonds and the dollar also benefit from some safe haven demand after an explosion in Beirut – following a Hezbollah attack on Israel during the weekend – escalate the geopolitical tensions in the Middle East and directs capital toward safe haven assets. In this context, gold extends gains above the $2400 level and the franc advances. The USDCHF is no longer on track to extend the ytd gains, on the contrary, the pair slipped below a key Fibonacci support back in mid-July, the major 38.2% Fibonacci retracement that stands 0.8885, and is now in the bearish consolidation zone. The tense geopolitical setup and softening Fed expectations explain the U-turn in the USDCHF. However, the global easing vibes will certainly encourage more interest rate cuts from the Swiss National Bank (SNB) this year, and should limit the USDCHF’s downside potential.

Inside tech

Beirut explosion, a swift flight to safety and a renewed selloff across the Big Tech stocks weighed on major US indices yesterday. The S&P500 fell 0.50% while Nasdaq 100 slid around 1.40%. Nvidia tumbled 7% to its 100-DMA. But, Nasdaq futures are in a better shape this morning following a 7.5% rally from AMD after raising its forecast for AI accelerators. Microsoft, on the other hand, didn’t blow anyone’s mind when it reported earnings yesterday. The overall revenue rose by a slightly better-than-expected 15%, but revenue from Azure, its cloud computing platform that’s the main growth engine, grew only 29%, down from 31% in the previous period. About 8 percentage points of that increase was due to AI, up from 7 percentage points, but it was not enough. The market first sent Microsoft shares 9% down, the price than recovered to settle with around 3% loss. Due today after the bell, Meta’s results will be important for those looking for hints that all that massive AI spending is bearing fruits. Meta had said last quarter that it needed to spend more on AI to get to a level of play that will generate revenue. Hopefully, that timeline doesn’t extend at this quarter’s announcement. Zuckerberg knows that investors’ patience is wearing thin as Meta trades some 15% below its July peak.

Bottom?

US crude tumbled to $75pb level yesterday, unable to recover from the negativeness of the sluggish Chinese growth. But the rising geopolitical tensions and a major decline of nearly 4.5-mio-barrels in the US oil inventories last week help to bring the dip buyers in near the $75pb level. I believe that we may have hit a bottom near the $75pb this week. And I also believe that the lower the prices will go the higher the chance of a delay from OPEC to exit its production cut strategy.

Note that I will be on holiday for the next two weeks. See you again in August!